Banking giants are launching a fight back against claims they were involved in earning commission on car loans that cost drivers tens of billions of pounds.
It is alleged that brokers selling car loans to people buying a new vehicle inflated the interest rates in order to grab hidden commissions.
Many of the big banks approved these policies and, if these are found to be unfair, they now face the prospect of paying compensation to millions of car buyers.
Some have already set aside hundreds of millions of pounds to cover the costs, but it appears at least one, Barclays, is trying to mount a legal challenge.
The tactic of inflating interest rates to fund commissions was outlawed by City watchdogs at the Financial Conduct Authority (FCA) in 2021 on the basis it was unfair.
However, it appears millions of people may have been charged this hidden commissions before that date. And they may now be due refunds.
Martin Lewis has suggested the scale of the scandal could be huge with some estimates drivers may have been unfairly charged tens of billions of pounds.
He has set up an online reclaims tool to help people reclaim the unfair loan commissions which has already seen more than 1 million people sign up.
The FCA has launched an inquiry to establish the scale of the problem in terms of the number of people and sums involved.
The basis of its inquiry are findings of the Financial Ombudsman Service (FOS), which ruled that Barclays “failed to act fairly and reasonably” in the case of a customer – known only as Miss L – who was not made aware that a loan agreement she entered into included a commission payment worth nearly £1,600.
A second case was upheld against Black Horse Finance. In this case a woman, identified as Mrs Y, was charged an inflated interest rate which included a big commission for the loan broker.
It has now emerged that Barclays is to mount a legal challenge to the FOS decision on which the allegations of illegal and unfair commission is based.
Bank investors fear they could be exposed to compensation running to tens of billions of pounds, drawing comparisons with the payment protection insurance (PPI) scandal.
In its annual results in February, Lloyds Banking Group made a £450m provision for potential compensation arising from the FCA’s probe into interest-linked commission payments.
Close Brothers, the mid-sized specialist bank, has seen its stock hammered over its relative exposure to the issue.
In a statement following an enquiry from Sky News, a Barclays spokesperson confirmed it is challenging the FOS decision upheld against the bank,
A spokesperson said: “We do not agree with the Financial Ombudsman Service’s decision in this case and are therefore challenging it.
“This challenge relates to a single, specific case and we continue to support the Financial Conduct Authority’s review into historic motor financing arrangements.
“Due to the ongoing nature of this case, we cannot share anything further at this time.”
People close to Barclays pointed out that its legal action was against the FOS decision, not against Miss L or any other interested parties.
They added that the bank had complied with the award required by the Ombudsman and had ensured that the customer would not lose out financially as a result of the challenge.
Barclays, they said, “welcomed” the FCA’s wider review into the sector.
